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Pa. prosecutor eyes gas royalty check complaints

By MARC LEVY Associated Press

Updated:
02/15/2014 03:53:24 PM EST

HARRISBURG, Pa.—Following a request by a state senator from northern Pennsylvania, state Attorney General Kathleen Kane is reviewing whether her office has jurisdiction to investigate complaints into the costs that natural gas exploration giant Chesapeake Energy Corp. deducts before it pays royalties to the owners of land where it drills.

A Kane spokesman said Saturday that her office was undertaking the review at the request of Lycoming County Sen. Gene Yaw, whose district includes heavily drilled areas of the Marcellus Shale natural gas reservoir.

"Attorney General Kane takes her duties to protect Pennsylvania's consumers as among her top priorities," spokesman Joe Peters said.

Yaw wrote Thursday to Kane and asked for an immediate inquiry. He said his office has been inundated with complaints, primarily involving the deduction of post-production costs by the Oklahoma City-based Chesapeake Energy.

Yaw said the deductions sometimes exceed the amount of the royalty check and that one landowner complained it was costing them money to have gas extracted from their property.

"The words commonly used by landowners to describe what is happening are "cheating,' 'stealing' and 'fraud,'" Yaw wrote.

It is a significant consumer protection issue for hundreds of his constituents, he wrote.

In a separate letter Thursday, Gov.

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Tom Corbett wrote to Chesapeake Energy's president and CEO, Doug Lawler, suggesting that he has complained to Lawler several times about the company's deduction of post-production costs.

"Deduction of post-production costs, in a manner which seemingly few if any other operators in Pennsylvania utilize, has caused a significant erosion of the trust and goodwill the natural gas industry has established with Pennsylvania leaseholders and local communities," Corbett wrote.

Corbett said he was sending a copy of the letter to Kane's office to urge her to examine the matter and asked Chesapeake Energy to "take immediate action to restore the fair treatment of my constituents."

Pennsylvania state law guarantees landowners a minimum one-eighth royalty—or 12.5 percent—from the production of oil and gas on their land. After the Marcellus Shale lease rush began in 2008, dozens of cases bubbled up in Pennsylvania courts over what costs could be deducted before the royalty was calculated.

In a 2010 state Supreme Court decision, Justice Max Baer noted that the term "royalty" and the method of calculating a one-eighth share is not defined by the state's Guaranteed Minimum Royalty Act.

However, he cited various texts on the industry that say a royalty is paid from the net amount remaining after deduction of certain production and well development costs and noted that many land leases in Pennsylvania calculate the royalties minus the post-production cost to bring the gas to market.